Today’s news on payday lending is welcome, but enforcement matters as much as legislation

The campaign to tackle the payday lending sector has been gifted another small victory today as the Department for Business, Innovation, and Skills publishes a report calling for more focussed regulatory attention to the sector.

The campaign to tackle the payday lending sector has been gifted another small victory today as the Department for Business, Industry, and Skills publishes a report calling for more focussed regulatory attention to the sector.

Today’s publication draws on several recommendations the governmnent and Financial Conduct Authority should carry out, including:

– Limit the number of times that payday loans can be rolled over to just one;

– Introduce stronger constraints on the use of Continuous Payment Authorities to stop lenders raiding the bank accounts of people in financial difficulties; and

– Require payday lenders to enter details of their loans on a real-time database to prevent lenders from making multiple loans and continually refinancing existing debt.

These are to sit alongside the recent call by the Treasury to put a cap on the total cost at which a payday lender can charge into legislation.

However the criticism here is that with exception of the cost of credit, all of these issues that BIS are calling for focus on have been consistently overlooked by regulators since campaigners started to raise attention of the payday industry. Our concern is with the new regulator: will these issues be overlooked again?

Checking a borrower’s affordability, not misusing the continuous payment authority, and rules on advertising have been obliged of payday lenders since the OFT began regulating consumer credit. The problem was not lack of rules, but lack of enforcement. We need to be certain that regulators do their jobs properly.

We only have to look abroad to see where even with regulations in place payday lending can still flourish.

In Ohio, USA, a great victory for campaigners against irresponsible lending occurred in 2008 when enough signatures were gathered to win a referendum that capped the costs at which payday lenders could charge.

A ballotpedia page reads:

“The Ohio Payday Lender Interest Rate Cap Act, also known as Issue 5, was on the November 4, 2008 ballot in Ohio as a veto referendum, where it was approved. This statute puts a cap on interest rate payday lenders can charge at 28 per cent.”

In Gary Rivlin’s excellent book Broke, documenting the early rise of the poverty industry, he catches up with Allan Jones, one of the first and well known payday lenders in the US. Despite working out that he made around $10,000 an hour in 2008, he was fuming at the prospect of losing more from the Ohio vote.

He had already shut down forty of his ninety four stores there, which represented around $720,000 of his potential profits. But don’t sound your tiny violin too loudly just yet.

As one recent report by Sheryl Harris, a respected consumer journalist in Cleveland, put it:

“For the last five years, payday lenders have simply continued doing business as usual in Ohio without interference from regulators.”

The notion that, as reported “legislators had some sort of unspoken understanding that payday lenders would simply continue to issue payday loans: two-week loans that carry interest rates of 391 percent or higher” – should remind us that the important thing is often not just legislation, but enforcement.

So while I am happy that there is now a cap on the cost of credit being discussed and decided in the UK, as well as a focus on rules and regulations of the payday lending industry by BIS, we still have reason for caution.

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